Investment Assets

The fi fth bucket is your investment bucket. Not all people actually use this bucket, but in cases where it is used it can easily become the largest of all of the buckets and give you the most long-term fi nancial security. This bucket contains those non-liquid investment assets, such as rental real estate, your company(s), long term non-liquid investments, or an expected inheritance .

Throughout a person’s working life, if they own a company and that company is their major source of income the salary and wages from this asset are added to the Liquid Assets Bucket . However, the increase in value stays in the Investment Assets Bucket until there is a liquidity event . If there is a liquidity event, the proceeds are added back to the Liquid Assets Bucket . With proper planning and a well thought out exit strategy, liquidating a major investment asset can add a lot of value to the Liquid Assets Bucket and provide you with enough assets in that bucket to supplement your cash fl ow from the other buckets .

In many cases, if a person uses investment assets, like rental real estate, to supplement their annual income, there may never be a liquidity event for them. This is due to the fact that many times it is often more benefi cial to pass these assets to other family members through a well thought out estate plan .

As a person adds to these buckets over the course of their life, the investment plan might only need to be updated once or twice a year. As the person gets closer to “retirement” and begins planning to live off of these assets, the investment advisor’s work is more frequent and should move to 3-4 updates per year. This ensures that the person will receive pro-

fessional guidance that will help them navigate through fl uctuations in the market and other issues that might arise.

Aside from investing in businesses or rental real estate, many people also choose to invest in fi nancial markets where they invest their money with the goal of a fi nancial asset growing in value, along with providing interest and dividends. There are four types of traditional fi nancial assets that one would use to seek earnings:

1. Cash or Money Market funds (not a great choice for investment in our zero interest rate environment – however, this is a great vehicle to act as a liquid emergency fund) - During the past 80 years, an investment in cash represented by the one-month US Treasury Bill has yielded an average return of 3 .6% . During the same time period, infl ation has averaged 3.5%.

2. Bonds – Bonds are loans to governments or companies where you earn interest and then are paid back the principal investment at an agreed upon future date . Where cash investments returned 3 .6%, long-term corporate bonds on average returned 6 .2% per year .

3. Stocks – A share of stock represents equity ownership in a publicly traded company . Stocks are the most risky of the three traditional asset classes. However, with risk, comes great opportunity for reward. Throughout the past 80 years, cash returned 3 .6%, bonds returned 6 .2%, and stocks returned 10 .8% .

4. Mutual funds – Investing in mutual funds is a great choice for a person that does not have the knowledge or time to invest in individual securities. When investing in a mutual fund, shareholders invest a certain amount and a fund manager uses the funds to invest in a diverse array of holdings based on the stated goals of that particular fund. Funds can be actively managed, where a manager trades, buys and sells stocks or bonds on a regular basis in hopes of beating the market, or passively managed, where fund managers “track” an index like the S&P 500 by purchasing the same shares in an identical proportion with the goal of reaping the same returns as that index. We will focus more on active vs. passive investing in Chapter 4.